Strict Approach to Price Recommendations in Swiss Competition Law

Abstract

The Swiss Federal Supreme Court has qualified a non-binding price recommendation by Pfizer as unlawful vertical resale price maintenance, sanctionable with a fine. As a consequence of this judgment, price recommendations with which a large proportion of a manufacturer’s retailers comply can be illegal, in particular if the price recommendations are regularly updated and automatically displayed in the retailers’ cash register system. It is not required that the manufacturer exerts pressure or offers special incentives to its retailers. This new practice on non-binding price recommendations is therefore stricter than the corresponding rules under European competition law. Companies that supply retailers in Switzerland should critically review their non-binding price recommendations in light of this judgment.

Price Recommendations before the Supreme Court

The Swiss Federal Supreme Court ruled in its judgment of February 4, 2021 (published on April 21, 2021), that Pfizer would be fined an amount yet to be determined for making price recommendations to pharmacies and self-dispensing doctors in violation of Swiss competition law.

The Swiss Competition Commission (COMCO) had conducted investigations against three manufacturers of erectile dysfunction drugs, Bayer (Levitra), Eli Lilly (Cialis) and Pfizer (Viagra). It had fined these companies a total of CHF 5.7 million in a decision dated November 2, 2009. All three companies subsequently challenged COMCO’s decision before the Swiss Federal Administrative Court, where they prevailed. The Department of Economic Affairs, Education and Research filed appeals with the Supreme Court.

The parallel proceedings concerning Bayer and Eli Lilly are still pending before the Supreme Court.

Price Recommendations as a Concerted Practice

In connection with the sale of Viagra, Pfizer sent its retailers – i.e., pharmacies and self-dispensing doctors – price recommendations via an electronic system. The price recommendations were expressly non-binding. The electronic system was designed in such a way that the current price recommended by Pfizer automatically appeared in the retailers’ cash register system when they scanned the barcode of a product. This system is used by pharmacies for all medicines for efficiency reasons due to their large range of products.

The Supreme Court held, with reference to European competition law, that under these circumstances Pfizer was able to assume that the retailers were always aware of the recommended price and would refrain from setting their own prices in view of the additional effort required to calculate them. With regard to the retailers, the Supreme Court held that they had accepted the price recommendation and, for their part, assumed that the other retailers had the same price information. In addition, some of the retailers had asked Pfizer to provide price recommendations. The Supreme Court qualified the non-binding price recommendation as a concertation between Pfizer and the retailers.

The Supreme Court further examined whether the price recommendations had been complied with by the retailers. It mentioned that compliance by 50% of the retailers was often considered as sufficient for there to be a concerted practice. In the present case, 89.3% of the pharmacies and 81.7% of the doctors had set their prices according to Pfizer’s price recommendation. Since this system had lasted for several years, the Supreme Court held that the concertation had been causal for the retailers’ prices. The fact that numerous pharmacies had granted discounts on the recommended prices in their cash register systems was found by the Supreme Court to be irrelevant.

Price Recommendations as Resale Price Maintenance

According to the Supreme Court, due to the high degree of compliance by retailers, the concerted practice between Pfizer and its retailers had the same effect as prescribed fixed prices. Under Swiss competition law, vertical fixed-price agreements (resale price maintenance agreements) are among the most harmful vertical restraints and are sanctioned with a fine.

A Strict Approach

Under European competition law, price recommendations are only unlawful if a manufacturer exerts pressure on its retailers or offers them special incentives to comply with the price recommendation. The Supreme Court did not consider these elements to be necessary. As a result, Swiss competition law in the area of price recommendations is stricter than European competition law, in contrast to previous practice. Moreover, the Supreme Court contradicted its own leading Gaba decision, where it had stated that in the area of hardcore vertical agreements, the Swiss legislator intended to create a «materially identical regulation» in line with European competition law.

The only mitigating element mentioned by the Supreme Court was that price recommendations in catalogs, as they are for example common in the automotive industry, are not assessed with the same degree of severity because there «the manufacturer does not repeatedly communicate its price to the retailer and transmit it via the cash register system».

Consequences for Companies

The Supreme Court’s Pfizer judgment has a number of far-reaching consequences for companies operating in Switzerland:

  • Non-binding price recommendations vis-à-vis retailers are to be examined particularly carefully from a competition law perspective.
  • Even price recommendations described as «non-binding» can be sanctioned as unlawful resale price maintenance if they are complied with by the majority of retailers; it is not necessary that the manufacturer exerts pressure or offers incentives to its retailers.
  • Static price recommendations (e.g. in catalogs) are more likely to be considered unproblematic; regularly updated price recommendations are more likely to be considered problematic.
  • Despite their efficiencies, the Supreme Court held price recommendations that appear automatically in retailers’ cash register systems (e.g. via barcode scanning) to be illegal. This far-reaching judgment is expected to cause substantial practical problems for undertakings.

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